Since the start of the COVID-19 pandemic, airlines have undergone three years of non-stop change and adaptation to survive. Labor costs have been rising dramatically. Business travel has recalibrated to a post-COVID world of videoconferencing and concerns about recession, prompting a significant alteration in the passenger mix. Airline networks have transitioned to achieve more efficient operations, while accommodating a post-pandemic resurgence of leisure travel.

In short, the airline industry — particularly in the United States — has adapted swiftly and smartly to constant and unrelenting pressure. It wasn’t painless, but over the last 12 months airline agility has begun to pay off.

Oliver Wyman’s annual Airline Economic Analysis documents and quantifies the trends affecting the airline industry. While relying on the US Department of Transportation reporting and other related sources for in-depth financial and operational analysis of the US-based carriers, this year’s report also looks at global capacity along with shifts in passenger mix, especially as related to business travel, leisure and bleisure, and premium economy categories. It also explores pressures at the airport, including on-time arrivals and airport lounges.  

A patch of smooth air amid turbulence

The name of the game for airlines in 2022 was once again transition. New chief executives took over at American and Southwest Airlines. Value carrier JetBlue agreed to acquire the largest ultra-low-cost carrier (ULCC), Spirit, although that merger is now being challenged in court by the US Justice Department. Airline fees and operational performance became political targets, and US airlines may face increased regulation as a result.

As airport crowds multiplied, labor in the cockpit, cabin, and on the ground remained in short supply — continuing to pressure on-time performance and schedules.  Labor shortages also plagued air-traffic control, prompting the US Federal Aviation Administration to encourage airlines to limit the number of flights at peak periods in congested airports like those in New York and Washington DC.

Demand recovery and profit recovery have been uneven globally, but more steadily trending up in the US. How well individual carriers can continue to adapt to the transition will determine their success for the next year and likely beyond. 

Back in the black for full-service carriers

The three US full-service carriers returned to profitability in 2022, collectively netting more than $2 billion for the full year. The turnaround took hold in the second quarter, with $4 billion in cumulative operating profits for that three-month period. These carriers repeated that performance in both the third and fourth quarters.

Delta has had the strongest recovery so far, with net earnings of $1.3 billion in 2022, compared with $737 million at United and $127 million at American. Still, even Delta’s earnings are a long way from the $4.8 billion the carrier earned in 2019.

International traffic has been a sore spot. For full-service airlines, international capacity was still down 37% from 2019 at the end of 2022. But 2023 summer schedules for international routes are building back with major increases in the number of flights available.

Value and ULCC ups and downs

Results were mixed for both value carriers and ULCCs. Like the full-service group, value airlines generated profitable operating results during the second and third quarters of 2022. For the year, Southwest and Alaska were profitable but JetBlue and Hawaiian posted net losses.

ULCCs as a group continued to post losses in 2022, with net losses at Spirit and Frontier overwhelming small annual profits at Sun Country and Allegiant. ULCCs have continued to expand capacity, despite the red ink, leveraging their cost advantage to capture additional market share.

But operating costs have been skyrocketing for ULCCs. In the third quarter of 2022, for example, ULCC carriers’ unit cost increased more than 41% compared with the same three months of 2019, even though they had added 10% more available seat miles (ASMs) during the period. While every cost category increased during that quarter, fuel took the biggest hit, rising 77% versus the same period in 2019.

It’s worth noting that the two US airlines with the largest 2022 losses — JetBlue, with a net loss of $362 million, and Spirit, with a net loss of $554 million — are looking to merge. 

Hub efficiency first

Airlines have reset their networks quickly to put seats where passengers want to go. But they have done more than that. Oliver Wyman’s proprietary network forecast modeling, NetPlan, reveals that carriers are laser-focused on the efficiency of their hubs as they battle to grab more market share despite labor and aircraft shortages and reduced business travel.

Carriers are creating more itineraries per flight, while average journey times are declining. Instead of smoothing out schedules at hub airports, peaks have become more pronounced, increasing connecting opportunities even with fewer total flights.

Worldwide, the number of flights per route has declined 11%, while the number of seats per departure has increased 4%. That’s in part because airlines are providing more capacity by opting to fly larger aircraft on some routes. In 2022, total global flight volume was 18% below 2019 levels. Yet connecting demand opportunity — an indicator of how well a network generates demand for its individual flights — only dipped 4%, as measured by the number of itineraries created by the schedule per flight.

Scheduled journey time declined by 5%. Planes didn’t move faster: The dip was because passengers were able to connect more quickly to their next flight or took advantage of more non-stop service. Even while some airports have lost service altogether, the majority of airports, on average, now have more destinations with non-stop service.

Road warriors still MIA

One of the biggest challenges is the growing acceptance that business travel has changed significantly, and perhaps permanently. The rebound in corporate travel plateaued at about 70% to 80% of 2019 levels, and even airline executives who had bullishly forecast a full recovery now say that may be as good as it gets for some time to come.

The reasons are many. Lifestyles have changed with workers desiring less time away from home. Office routines have changed, with more people continuing to work from home more often. Improvements in video conferencing technology have increased the preference to conduct routine meetings virtually to save time.

A sampling of leisure-oriented airports and select business-heavy airports in Europe and North America, using Oliver Wyman’s PlaneStats data, confirms the change in the travel mix. In 2022, European leisure airports returned to the same levels of seats available in 2019, where business airports only brought back 80% of the 2019 seats. The North American leisure airports had about 10% more seats than they had in 2019, while business-heavy airports only had 90% of the 2019 seat capacity. 

Willingness to pay for comfort

Premium economy seats are playing a larger role in airline offerings and seating layouts, with rising numbers of high-end leisure traveler and former road warriors opting for seat choices with more amenities. While business travel was down, the willingness to pay for more amenities allowed airlines to replace some of the revenue lost from corporate purchases of high-fare tickets.  

That inclination to pay more for airfare, whether for upgrades or because of the rising cost of travel, has paid off in better yields. In the second and third quarters of 2022, the yield of full-service carriers increased more than 20% over the same 2019 quarters. Value carriers and ULCCs also saw similar double-digit yield increases in those periods.

The persistence of regional jets

The three largest US carriers — which employ approximately 45% of the global regional jet fleet — have significantly reduced regional jet capacity. The cutback is sometimes triggered by regional airline decisions to make routes more efficient and profitable by cutting flights and substituting larger aircraft so the remaining flights will have more seats to fill. More often, it is linked to the industry-wide shortage of pilots and the hiring away of regional pilots by larger carriers.

Higher fuel prices make regional service more costly, too, on a per-seat basis. When demand is high, larger airplanes become more economical. In 2022, the regional jet fleet in the US stood at 1,396 planes, down 14% from 2019.

But cutbacks to the regional jet fleet are nothing new. As far back as 2010, large airlines started reducing the share of regional capacity in favor of mainline capacity. Analysis and modeling using Oliver Wyman’s NetPlan support an additional cutback of 7% in regional jet capacity from 2022 levels, or another 104 aircraft, to hit the optimal profit level. If a shortage of pilots or increasing pilot costs drive even further regional jet fleet reductions, airlines could potentially tolerate a 22% decline before the loss of regional capacity begins eroding airline profits. That would take the fleet down to 1,087 aircraft.

The NetPlan modeling suggests that a drop of between 7% and 22% in regional jet capacity is likely. Further reduction would depress profitability. Current order books suggest carriers could reach that level in one to four years. While this portends continued contraction, it also supports the notion that a large number of regional jets — more than 1,000 in the US — will remain economically viable for the foreseeable future.

The airport squeeze

Strain on capacity is not only being felt by airlines. Crowds of travelers have descended on many airports before they were fully staffed and prepared to handle the masses post-COVID. That’s put a strain on airport services — from food operations to maintenance staff as low unemployment, especially in the US, has made it hard to find workers.

It also hurt airport on-time performance, as measured by flights departing within 15 minutes of scheduled gate departure time. In 2022, on-time performance at Hartsfield-Jackson Atlanta International Airport — the world’s busiest — was 78% versus 83% in 2019.  Meanwhile, Toronto Pearson Airport dropped to 55% in 2022 from 71% in 2019; London Heathrow fell to 55% from 75%; and Singapore dropped to 77% from 86%.

Contributing to those declining on-time numbers has been a widespread shortage of baggage handlers and other ground personnel at airports. Bottlenecks, such as delays in employee screening and badging and challenges in training, have exacerbated frontline worker shortages. Further aggravating operations has been the shift to a greater mix of leisure passengers and those who fly less frequently. Generally, they require more processing time by airline personnel because, for example, they have more baggage to check.

Long lines to the lounge

Another post-pandemic trend at airports: increased use of high-end credit cards with lounge perks, driven by bank partnerships that sustained many airlines financially through the pandemic. The rush to gain access to lounges has created long lines and a spate of social media outrage over wait time.

Airports and airlines are addressing the staffing challenges by offering higher pay and wage supplements, working with government to fast-track work permits, visas, and background checks, and even sending office personnel to the front lines. Some airports even capped the number of passengers at times because of labor shortages, forcing airlines to cancel flights.

Increased collaboration between airports, airlines, and key third-party suppliers can help lessen the impact of the labor struggles. Enhanced data sharing and planning for travel peaks can also reduce disruptions. In addition, identifying best practices and sharing them across airports can improve efficiency and ease the transition.